401k Plans

401k Plans

Begin a career. Check. Start a family. Check. Begin and continue to add to your family savings. Check? When you started working your first job at your first company out of college you most likely filled out paperwork for retirement savings, specifically putting away money in social security and in a 401 account. But where has it gone from there? Are you constantly increasing the percentage of money your 401k plan receives? Have you compared the family investments of your 401k with your spouse? Do you know what happens to your savings if you switch jobs?

If you answered no to most of these questions, relax. Many people in their 30s and 40s are unaware of the “in-between step” – the step between starting your 401k plan and retiring. So how do you make the most out of your 401k?

401k Contributions

As one of our questions asked, have you increased the percentage of your 401k plan? Most company plans match your family investments anywhere from 25-100%! However, this bonus is only given if you contribute a certain amount into your savings. Most likely, you can spare more than the 3% you began adding to your 401k when you were 22-years old. If your company requires you to contribute 7% of your pay to get the full match, do it! If you can afford more, then do that! If you already have a percentage that is close to that going into your 401k you most likely won’t even notice the little percentage increase.

According to Yahoo! Finance, “many financial planners recommend you sock away 10 percent to 20 percent of your income all through your career.”You should be maxing out your retirement plan, putting as much as you can in it,” says John Corn, CPA, an investment advisor with Buckingham Asset Management in St. Louis. In 2010, the maximum you can contribute to a 401(k) or 403(b) plan is $16,500 for employees up to age 50.”

401k plan vs. Roth IRAs

People are contributing to a Roth IRA program today more than ever. Roth IRAs have less taxes and fees placed upon them, both at the start up and when you are cashing out your savings at retirement. A Roth IRA is an excellent supplement to a 401k plan. However, don’t be overzealous. Keep your family budget in mind and don’t try to put too much of your family income in savings.

As the years progress and your family savings expand, then look into a Roth IRA. For now, if finances are tight (and let’s face it, when aren’t they?) sticking to your company’s 401k plan is a smart choice.

Rolling Over Your 401k

If you aren’t careful when switching jobs, you might lose a lot of from your retirement and family savings. To prevent this, the best thing to do is participate in a rollover of your current 401k plan. The 401k rollover option allows you to transfer your already existing retirement account to another without being overly taxed or penalized for doing so. Remember, funds in a 401k account are pre-tax dollars and grow tax-deferred. However, there is a chance you will get taxed in some way when rolling over. Rolling over 401k plans can be done different ways, and each way depends on if the customer gets taxed or not. Here are the fees you will have to pay if you receive an actual check from your previous employer to roll over into your new employer

  • The money in your hand is considered a form of income and will be taxed
  • If you roll the check into your new 401k plan within 60 days you can avoid paying the income taxes
  • If you only roll over a portion of your previous 401k, the rest of it will receive only an income tax and possibly a 10% penalty due to early distribution (meaning you took it out before being 59½ years old)

Now, if you were let go from your old job and still haven’t found a new one, or you just don’t want to place your old funds in your new 401k, there are other options of where to roll your 401k contributions to. A brokerage IRA or mutual fund company IRA are options that have pros and cons associated with them.

Brokerage IRA

Pros: ultimate flexibility, lots of investment options including ETFs, low expenses, no investment minimums

Cons: fee every time you place a trade with most brokers, recurring expenses on top of trade commissions with ETFs

Mutual Fund Company IRA

Pros: cheapest way to invest funds, no commissions, no account fees (usually), easy to keep track of investments

Cons: limited flexibility, no individual stock or ETF options, contribution requirements

No matter what you decide to do with your 401k, remembering to keep adding to it as your children grow and your career flourishes will help guarantee a financially stable retirement for you and your loved ones.